Thursday, 9 October 2008

End to free market capitalism?

So, the UK has followed the US and bailed out the banks. Latest estimates are that it could cost £500 billion. This is on top of the £200 for Northern Rock and £50 billion for B & B. I make that £750 billion. That is a serious amount of cash. Over 1/3 of the GDP of the UK. That is pretty worrying.

But, we are told, our cash is safe and may even result in a profit! And, most importantly, there are strings attached and the top execs will have limits placed on pay and bonuses etc. What these will be in practice is not clear.

And, the banks will have to reform their practices, increase their liquidity, and thus stop taking such massive gambles leaving them exposed to a similar problem in the future. Gate, horse and bolt spring to mind, but never mind.

But, and this is where there is a glimmer of hope. The mood on the street seems to be increasingly anti free market. Obama is talking about a retreat from unregulated markets in the US, and there seems to be an appetite for regulation over here too. There seems to be a recognition that many of the assumptions about free market capitalism are wrong. Allowing unregulated competition doesn't result in trickle down wealth, it results in large profits for a few large companies.

For example, we are told that the price of our utilities has gone up because the price of wholesale gas has gone up. We can cope with that. But why have utility company profits jumped at the same time? The only explanation is that the price we pay has gone up by more than the price of wholesale gas. If not, their profits would remain unchanged. And without regulation, will the markets prevent such blatant profiteering. The answer is clearly no.

The same is true with the price of petrol. We all know that the price of fuel has fallen by far less than the cost of oil. Oil is back to what it was 9-12 months ago and we are still paying 20% more than we were a year ago. Without regulation, the market will not lead to reduced prices.

While a bail out of the banks may be necessary to prevent a total meltdown of the economy, unless it is accompanied by a new and brave world of increased government regulation to correct market failures - namely profiteering by the big boys - this will prove to be a wasted opportunity.

If this is indeed Mr Brown’s Falklands moment, I hope he is brave enough to do the right thing and once and for all reject unregulated free market capitalism.